Using Theory for Measurement: An Analysis of the Cyclical Behavior of Home Production

A significant amount of economic activity takes place within the home. Unfortunately, it is difficult to assess the cyclical properties of home production because the available data are too sporadic. Using a Real Business Cycle model, we construct quarterly data on three variables that are unobservable at a quarterly frequency: hours worked in the home sector, hours spent in leisure, and the consumption of home-produced goods. Three results emerge: leisure is countercyclical while nonmarket hours are acyclical; hours spent in home production have declined significantly since the 1970s; fluctuations in market output are a good measure of fluctuations in individual utility as long as home and market consumption are either extreme complements or extreme substitutes in the production of utility.